Microsoft (NASDAQ:MSFT) is set to announce its Q3 FY 2014 earnings on Thursday, April 24. During the quarter, the company named Satya Nadella, former head of the cloud and enterprise division, as its new CEO. [1] Over the course of last two months, Mr Nadella has re-stated Microsoft’s commitment to developing a comprehensive suite of software that extensively uses cloud technology, and is easily deployable on mobile devices. Additionally, the company continues focus on the sale of smart connected devices such as tablets and smartphones to bolster its revenues, and improve its market share in mobile devices vertical. It is also focusing on its Virtualization and Cloud platforms, respectively called Hyper-V and Azure, to leverage the fastest growing segments of its enterprise markets. In this earnings announcement, we will continue to closely monitor the revenue growth from these initiatives i.e mobile devices, cloud and operating system.

The global PC shipment is still reeling from decline in demand. However, the severity of the decline eased significantly compared with the past seven quarters. According to Gartner, the global PC shipments market shrank by just 1.7% in Q1 2014. [2] Key here is Microsoft’s termination of support for Windows XP, which is forcing laggards to upgrade from this populat OS.

Microsoft is increasingly pursuing its devices and services strategy to reduce its reliance on PCs, and expand its footprint into the mobile hardware domains. In this earnings announcement, we are closely monitoring Microsoft’s unit sales and revenue numbers for its devices and consumer hardware segment. This would give us a fair indication of how these devices have fared, and whether its devices are gaining traction amongst users.

Cloud Products And Services To Drive Revenue Growth

Microsoft is steadily making progress in the cloud domain. Its Office 365 offering continues to bolster revenues for Windows Office division, which makes up 40% of our estimated value. On the other hand, strong adoption of cloud based Azure platform continues to drive growth at server division, which makes up 24% of our estimated value.

The company continues to support adoption of its cloud services through a host of initiatives such as free Office 365 access to students and new server and cloud enrollment offers. We believe that these steps will augur well for the company, and expect it to report growth in revenue run rate from cloud products and services. We anticipate that Office 365 will clock in over $1.7 billion annual revenue run rate as its clients adopt the feature-rich, cloud-based Office software. Additionally, we expect strong adoption of Azure platform will continue to bolster the commercial licensing revenues, which maps onto our server division vertical.

Windows 8.1 License Sales In Focus

Windows Operating System (OS) is Microsoft’s third largest division and makes up around 10% of its stock value according to our estimates. This division continues to report decline in revenues due to decline in global PC shipments. However, the company has taken a host of steps to bolster license sales of Windows 8.1.

During the quarter, Microsoft is said to have slashed the price of Windows 8.1 by 70% for pre-installation on devices costing less than $250. ((Microsoft Said to Cut Windows Price 70% to Counter Rivals, February 22 2014, www.bloomberg.com)) Note that such devices are precluded from receiving marketing support dollars amounting to roughly the first 20% of the discount. Furthermore, as we noted above, the company phased out support for Windows XP in April. We expect that these efforts will bear fruit and license sales to pick up gradually. In sum, new PC shipments, together with the existing installed base of Windows PC’s, should help Microsoft to post growth in license sales during the quarter. Therefore, in this earnings announcement, we will continue to pay close attention to the numbers of licenses of Windows sold in both the desktop and mobile vertical.

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